Renting to family and sub-letting legalities

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    Renting to family and sub-letting legalities

    Am I doing anything illegal with the way I'm rented my property?

    For almost 10 years now I have been the landlord of a 3 bedroomed leasehold flat in London which was originally purchased as an investment with the benefit that my daughter, on leaving Uni, would have somewhere cheap to live with improved security and stability. My daughter pays me rent, albeit at a reduced rate (whether I should charge her rent at all is perhaps a moral question for another discussion). The flat is also shared with 2 additional independent lodgers (sublets) providing me with additional rental income. Originally, this was all set up completely informally, a scenario which I suspect is extremely commonplace throughout the land.

    And all was well until a dispute with one tenant over the tenant's notice period became somewhat acrimonious. Since then I have taken a more responsible landlord approach and have put in place AST's for the sublets, handled the deposits wrt Deposit Schemes, as well as making sure everything is above board with the freeholder (there is no mortgage on the property). My daughter continues to pay a reduced rent (without deposit or AST), a discount for which she effectively plays the role of a managing letting agent, i.e. advertises & vets new tenants, supervises maintenance issues e.g. GSC etc., and collects the rent on my behalf.

    So, I think I'm now doing everything according to the law, but have I missed something?

    #2
    Originally posted by kennyj52 View Post
    So, I think I'm now doing everything according to the law, but have I missed something?
    Well it depends.

    It's an HMO, so it has to comply with all the basic HMO licensing, which most residential properties don't.
    The fire safety requirements can be onerous in a flat.

    The local authority may require it to be licenced, it's not a large HMO, so it depends on the local authority policy. It may be in a zone where HMO's are not allowed at all (but that's unusual).

    The AST's should reflect any constraints in your own lease, so that your obligations under that lease can be enforced on the tenants. It's unusual for leases to allow a property to be shared like this, but I guess it's pretty common in London.

    Technically your daughter should be registered as an agent as she is recompensed for the work she does, but that's being a bit picky!
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      Why dont you let your daughter have them as her lodgers. She could pay you an increased rent and the tenants wouldnt then have ASTs. I think it would still be an HMO though as I think the dispensation for 2 lodgers only applies to owner occupiers.

      Comment


        #4
        The 2 people exception is interesting because it might apply.
        I think that it extends to members of the owners "household" and I'm not sure what that actually means, but it sounds like a daughter would qualify.
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          Tax is payable on market rent, not the reduced rent received from your daughter.

          Comment


            #6
            Originally posted by MdeB View Post
            Tax is payable on market rent, not the reduced rent received from your daughter.
            If I don't charge my daughter any rent at all, do I still need to pay tax on the non-existent rent? Seems a bit unfair?

            Comment


              #7
              Forgetting the HMO (and tax) question for a moment.
              I think that a lot here will depend on who the 2 extra individuals are paying rent to.

              Are they paying it to your daughter as lodgers?
              Are they paying it to your daughter as tenants? (co-tenants?)
              Are they paying it to you?

              Comment


                #8
                Originally posted by MdeB View Post
                Tax is payable on market rent, not the reduced rent received from your daughter.
                I don't think this is correct.

                Any expenses incurred can only be deducted up to the amount of the rent received. You will not be able to carry any excess expenses forward. If there is no rental income you will not be able to claim any expenses at all.

                You won't have to pay tax on the market rent.


                Comment


                  #9
                  Originally posted by kennyj52 View Post

                  If I don't charge my daughter any rent at all, do I still need to pay tax on the non-existent rent? Seems a bit unfair?
                  I was wrong.

                  You are not taxed on income you did not receive, but you can only claim revenue expenses up to the actual rent received, you cannot offset excess expenses against other property income, and you cannot carry forward any excess expenses. So, for example, you may have problems claiming the cost of replacing the kitchen.

                  See, for example, https://www.gov.uk/hmrc-internal-man...manual/pim2130 and https://www.accountingweb.co.uk/any-...-family-member

                  I do not know how it works where the property is a HMO with separate ASTs.

                  Comment


                    #10
                    Originally posted by jpkeates View Post
                    The 2 people exception is interesting because it might apply.
                    I think that it extends to members of the owners "household" and I'm not sure what that actually means, but it sounds like a daughter would qualify.
                    I read that (https://www.legislation.gov.uk/ukpga...pied-by-owners) as the owner must be in occupation, but on r-reading I am not so sure.

                    It may be that by giving the daughter a share of the property and the other occupiers being her lodgers, the HMO issue might go away.

                    Sounds like one for proper legal/accounting advice.

                    Comment


                      #11
                      Now I know what it feels like to have opened a can of worms.

                      Seems like my daughter is considered a tenant irrespective of whether I charge her rent or not, so I should have an AST with her too. Interestingly, there was a time when I did have an AST for her as she used it for a Housing Benefit claim when she was out of work, but the claim was rejected because the AST was considered not to be a commercial document - because the landlord was her father.

                      So looks like I need to apply for an HMO licence after all - the council (freeholder) probably did not point this out to me when I informed them of the tenancies because I only sent in 2 ASTs at the time omitting the one for my daughter.

                      Comment


                        #12
                        She wouldn't (couldn't) be on an AST if you're not charging her rent, but otherwise yes, best to have things down on paper.
                        I am not a lawyer, nor am I licensed to provide any regulated advice. None of my posts should be treated as legal or financial advice.

                        I do not answer questions through private messages which should be posted publicly on the forum.

                        Comment


                          #13
                          So does that mean if I don't charge my daughter any rent, does that get round the need for an HMO licence?

                          Comment


                            #14
                            Originally posted by nukecad View Post
                            Forgetting the HMO (and tax) question for a moment.
                            I think that a lot here will depend on who the 2 extra individuals are paying rent to.

                            Are they paying it to your daughter as lodgers?
                            Are they paying it to your daughter as tenants? (co-tenants?)
                            Are they paying it to you?
                            Originally, and to keep transactions relating to the flat separate from my other finances, a "house" bank account was set up and conveniently there was already an unused bank account in the name of my daughter available for this. So all rent, rent deposit, payments e.g. utilities, council tax, repairs invoices, cleaning etc. are processed via this account to which I also have unrestricted access to and can manage and withdraw money from at any time.
                            For tax purposes though, I have always declared the rental profit in my own tax return. Perhaps the Inland Revenue would frown upon this arrangement, but if the rental income were to be taxed as part of my daughters income, then it would only be taxed at 20%, whereas it was actually taxed at 40% as I am a higher earner. I'm fairly certain though that most families would likely have found a much more "tax efficient" solution.

                            Comment


                              #15
                              Originally posted by kennyj52 View Post
                              So does that mean if I don't charge my daughter any rent, does that get round the need for an HMO licence
                              If your daughter doesn't pay rent, she's not a tenant.
                              That doesn't mean there can't be an agreement between you setting out the terms of her living there, but it's not a tenancy agreement and can't be an AST.

                              Having reread the actual HMO legislation, I think you need proper legal advice.
                              The legislation has a special exemption where the property owner or a member of their household lives in the property with up to two other adults.
                              In that specific case the property is not an HMO.

                              Because it uses the term a member of their household, it isn't very helpful, because elsewhere a household is defined by residence, the household basically live together in some way, which doesn't make sense if the member of the household can also occupy a different property.
                              When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                              Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                              Comment

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